Deciphering the FCA’s approach to authorising peer-to-peer lenders

What can the ten fully authorised peer-to-peer lenders tell us about what on earth the regulator is looking for?

It’s been over a year since the application deadline for peer-to-peer platforms wishing to become fully authorised passed. There are now ten fully authorised peer-to-peer lending platforms (as far as we’re aware), and these are the firms that either already are or will likely soon be offering Innovative Finance ISAs (which can include peer-to-peer investments).

But the really big beasts of the marketplace/peer-to-peer lending continue to toil away under interim permissions. This means that they still can’t apply to be ISA managers. And in all honesty, the IFISA is unlikely to truly take off without them.

So why haven’t the likes of Zopa, RateSetter and Funding Circle gotten the green light yet? And what of the authorised few? Are there any unifying characteristics?

These are the platforms which – to our knowledge – are currently operating under full 36H permissions: Landbay, Folk2Folk, Octopus Choice, Crowd2Fund, LandLordInvest, Crowdstacker, Peer Funding, Lending Works, Lending Crowd, The Money Platform.

The most obvious common denominator, at a glance, is size. Only one of these platforms (Folk2Folk) has lent more than £100m, according to AltFi Data's records. It may seem an obvious point to make, but Zopa, RateSetter and Funding Circle have each lent more than £1.5bn to date, and are fast closing in on the £2bn mark. They each command vast user bases of retail investors, and it's not a stretch to imagine that many of these would look to allocate ISA allowance to one of the big three if they could. It wouldn’t be a surprise to learn that the FCA is taking its time over authorising these firms simply due to the volume of IFISA money that they could quickly come to command. 

But there must be more to it than that, surely?

Landbay was authorised late on in Decemeber, after tweaking its model such that it would no longer pre-fund loans. Until recently, all loans on the Landbay platform were pre-funded by an institutional partner, and these loans were then refinanced by individual investors on the platform. But the company has now cut out the pre-funding phase, in order to satisfy the regulator’s demands.

Can we then glean from this episode that pre-funding is to be avoided by peer-to-peer platforms seeking full permissions? Not so fast. Octopus Choice, which was spun out of Octopus Investments in April 2016, got the go-ahead from the FCA last week. And Choice is far from a conventional peer-to-peer platform. It’s essentially a front-end investment portal for Octopus Property – a well-established property finance business which has lent over £2bn to date. Choice plays host to randomly allocated residential loans from the Octopus Property origination engine, and investors are invited to participate in funding these loans, with Octopus always retaining at least 5 per cent of every loan in a first loss position.

But the confusing part about all this is that Octopus Choice also pre-funds loans, using a liquidity partner, before then selling on loan parts to individual investors on the platform. This sounds remarkably like the process that Landbay was forced to alter in order to get the thumbs-up. However, when we spoke to Octopus, they informed us that they’ve “never been told by the FCA that pre-funding is not allowed”. And who are we to argue – they’re now fully authorised, after all!

Another issue that might be plaguing authorisation hopefuls, according to hearsay, is the nearness of some models to collective investment schemes. Platforms like Zopa, for example, used to allow individual investors to hand-pick loans, but have long since retracted that functionality. Investors on Zopa now allocate funds to one of three products, where their money is automatically spread across vast numbers of loans. From what we hear, this structure could be causing a headache for a number of platforms across the space. One issue might be that this model to a certain extent masks the rate that is being paid by underlying borrowers, particularly if the platform in question is lending to other lending businesses – as RateSetter does, for example.

Some, like Funding Circle, allow for both individual loan selection and for auto-investing on the same platform. But we suspect that the bulk of investors prefer the ease and simplicity of the latter method. And if the regulator is indeed uneasy about platforms that are built on the Zopa blueprint, it’s every bit possible that auto-investing tools are also a source of unease.

But these points alone cannot be the sticking point, because some of the platforms that have been authorised do the same sort of thing. Lending Crowd, for example, has an auto-invest tool. The Money Platform – peer-to-peer lending’s answer to payday lending – employs a RateSetter-style system of matching supply and demand (meaning you can’t select individual loans). And yet both platforms are fully authorised.

Another pain point that has come up time and again in our conversations is the use institutional capital, which is to a certain extent connected to the pre-funding point. From what we hear, the FCA is not against the use of institutional capital per se, so long as it is kept entirely separate from retail money. In other words: whole loans for institutions, fractional loan parts for retail investors. The latter of these two scenarios are 36H agreements, and must be kept clean of institutional money in order to stay that way.

Complicating matters further is the emergence of a new term (new to me, at least): “non-P2P agreements”. More to come on this over the course of this week.

If you have any insight to share on the authorisation process, please leave us a comment below, or get in touch directly. We'd love to hear from you.